It wasn't working. Goldberg and Shellhammer both knew it. Let's be fair: Fabulis.com, the social network they rolled out in January 2010, wasn't exactly floundering. The site--a lifestyle reviews and recommendations platform targeting gay men--wrapped up a Series A funding round valued at $1.75 million as the year drew to a close, with total membership eclipsing 110,000. But Fabulis wasn't exactly flourishing, either.

"We had about 30,000 people using the site weekly, but no matter what we did, we couldn't grow beyond that," Goldberg recalls. "We could get more people to come to the site, but they weren't sticking."

Bradford Shellhammer and Jason Goldberg of Fab.com

So in early 2011, Goldberg and Shellhammer (longtime friends who even live in the same Manhattan apartment building) began meeting for dinner every Monday night to explore how, or even if, Fabulis--not to mention their professional partnership--might survive. "If we didn't change something, it was going to be hard to work together," Goldberg says. "We were forcing ourselves to do something that wasn't fun, and we were beating ourselves up."

"At the first dinner, we started batting ideas around for what to do with the current business. At the second one, I said 'Let's put this all aside. If we could do anything, what would we do? We're smart, we're creative and we want to build a big business. What are the talents of our team?'"

The conversation shifted immediately to design. In January 2010, after trying numerous product models, the Fabulis team introduced a daily deals program, spotlighting special offers on fashion, furniture, accessories and anything else that captured their imagination. Despite the malaise afflicting much of the site, the deals initiative caught fire with users, quickly growing beyond the signature Fabulis user base to attract consumers from across the demographic spectrum.

"We saw a lot of people liked the stuff Bradford and his team were selecting," Goldberg says. "We had a disproportionate amount of buyers for the number of people on the site. We had between 300 and 700 people buying from the site every day, even though we only had 9,000 signed up for our daily deal list. Over dinner, we both said 'What if we sold design stuff?' People were building $100 million businesses around fashion flash sales, but no one was doing it in design." They decided to shut down Fabulis at the end of February 2010, having not garnered the traction they desired, but saw a glimmer of hope in the daily deals they had run.

The rebranded, reconceptualized Fab.com launched in beta in April 2011, officially going live on June 9. During the interim, the site signed up close to 175,000 members, all acquired using viral prelaunch invites. The size of the consumer segment and mounting buzz across the social media landscape proved irresistible to the designers and vendors approached by Shellhammer and his sales staff, and in its first week, Fab.com offered très chic, must-have products ranging from Alvar Aalto vases to FontanaArte lighting to vintage posters created by graphic design guru Milton Glaser--all available for just 72 hours and priced at up to 70 percent off retail.

"We did $65,000 to $70,000 in sales right out of the gate each day," says Goldberg, who remains Fab.com's CEO. (Shellhammer, a Parsons The New School for Design graduate who went on to spearhead Design Within Reach's Tools For Living store concept, is Fab.com's chief creative officer.) "It was all this pent-up demand, and we've built on it ever since."

Fab.com was already profitable in its first month, with orders exceeding 1,000 per day. The site now boasts more than 650,000 members and adds another 5,000 every day, most via social sharing--e-mails from members to their friends, Twitter mentions and Facebook shares and likes. New sales continue to debut at 11 a.m. EST, seven days a week, announced exclusively via Fab.com as well as a daily e-newsletter, with products running the gamut, from basics like kitchenware and jewelry to wildly impractical but undeniably cool objets d'art like The Lightbodies--life-size, human-shaped floor lamps crafted by the one-named artist Kilu.

Consumers aren't the only ones taking notice. Investors are responding, too, and in late July, Fab.com scored $8 million in a Series A financing round led by Menlo Ventures, with contributions from First Round Capital, Baroda Ventures and A Grade Investments, the venture firm led by actor Ashton Kutcher and entertainment mogul Guy Oseary.

"You can find cool, well-designed and authentic stuff in every category and every price point--you just have to look in the right places. But people don't always know where to look," Shellhammer says. "We're looking in the right places and bringing it to a bigger audience."

Fab.com's successful pivot from social networking to flash deals owes as much to the fundamental consumer appeal of its core concept as it does to the complementary strengths Goldberg and Shellhammer bring to the table. Fab.com is not Goldberg's first startup: After earning his MBA from Stanford University and dedicating six years of his life to working as an aide in Bill Clinton's White House, he co-founded Seattle-based online recruiting startup Jobster in 2003, raising $48 million before exiting the company in late 2007.

From there, Goldberg relocated to New York City and launched social news service socialmedian with the help of Nishith Shah in 2008, which was acquired by German professional networking site XING the following year for $7.5 million. Although Goldberg moved to Hamburg in 2009 to serve as XING's chief product officer, he yearned to run his own company once again.

"I spent six months at XING working, and the other six thinking of the next idea," he says. "I came up with the idea for Fabulis, and I asked Bradford to work with me because he has a creative charisma to him. He's always had a knack for seeing things other people aren't necessarily seeing. I wanted someone who could be the creative side to my geeky, analytical side."

At the time, Shellhammer was a year into his tenure as sales manager at fledgling design retailer Blu Dot, a job he accepted after leaving Design Within Reach. (He also contributes to design magazine Dwell and the Sundance Channel's Full Frontal Fashion website.) In addition to his creative sensibilities, Shellhammer's retail experience and his insight into the consumer consciousness are essential components of the Fab.com ethos. "When you work retail, you get to hear every day what people want," he says. "You realize how much joy something can bring to someone's life. It's a very emotional process."

Goldberg and Shellhammer spent the next year mapping out the Fabulis business model, meeting every day at Goldberg's kitchen table to outline their vision for the site. They put together the pieces of a social network optimized for the gay community, offering recommendations on places to go, activities to explore and people to meet, complete with Yelp-like consumer reviews and foursquare-esque mobile check-in capabilities.

"The Fabulis idea and prototype was far better executed than any we'd seen--we've seen a lot of niche social networks, and they're all pretty lame," says First Round Capital managing partner Howard Morgan, who invested in the company in its Fabulis and Fab.com iterations. "Jason is very metrics-oriented. To be successful, you have to understand the metrics, like cost-per-click and cost-per-acquisition. The key to any internet business is customer acquisition, and Jason is terrific at that."

But Fabulis struggled to find footing, especially as users became more and more comfortable addressing their sexuality across mainstream social media channels. "Everyone who looked at the site said, 'Wow, this is a beautiful design. The functionality is incredible.' But it became clear to us that we had built some really cool stuff that no one needed," Goldberg admits. "We couldn't get our friends to use it. When we asked them why, they said 'I already have Yelp. I already have Groupon. I already have foursquare. And Facebook is my gay social network. Why do I need this?' You can have a lovely product, but if there's not a demand for it, it doesn't get you very far."

Once Goldberg and Shellhammer committed to relaunching Fabulis to focus on design sales, Goldberg met with Allen Morgan, an early stage angel investor who also acts as a venture advisor at Mayfield Fund. "I walked him through our analysis, and he said 'You know what you want to do. If this is what you think you can execute on, you should do it,'" Goldberg says. "He helped me put together a strategy to pitch to the other board members. … I walked them through the same deck that I walked Al through … and after a 20-minute board call, we said, 'Let's do it.' It was astonishing."

Goldberg and Shellhammer shut down Fabulis immediately after the team decided to change directions, laying off all but one of their employees. "Once we made the decision to move on, we knew we had to do it that day. You can't dwell on it," Goldberg says.

Needless to say, some of Fabulis' most loyal users weren't happy with the move. "A few hundred people were really irate," Goldberg says. "But the fallout always seems louder than it really is." Shellhammer adds that their enthusiasm to get started on Fab.com made the decision to shut down Fabulis relatively painless. "It was easy, because we were passionate," he says. "There's nothing inauthentic about what we do at all. We're not in this to make money." He pauses, then corrects himself. "We are in this to make money," he laughs. "But our hearts are in it. It's real."

Fab.com's headquarters, near the center of Manhattan's venerable Garment District, resembles nothing so much as its daily newsletter come to life. Virtually everything in the large, open space is a product available during a Fab.com sale, from the Orange Mecha Banana toy by urban vinyl pioneer Frank Kozik to the eco-friendly hanging lamps produced by David Trubridge. Goldberg is even wearing one of the Hozell brand T-shirts up for sale that very day. But somehow, the disparate pieces fit.

"The beauty of the site is that we want you to see something new each day," Shellhammer says. "There's a freedom in our platform that allows us to take a chance on categories that wouldn't make sense in a traditional brick-and-mortar shop. In a store it's hard to sell a $4,000 credenza next to a $2 toothbrush. It doesn't make sense. But online, it does. It's the eclectic mix that is the theme."

Shellhammer retains final approval over everything Fab.com sells. He says he favors products that adhere to principles of innovation, form and function, as well as items with humor and "spunk." He also cherishes goods with a compelling personal story behind their creation. "When you go into a Pottery Barn or a Macy's Home, everything looks great, but when you buy a pillow, it's just a pillow," he says. "You don't know anything about it."

Fab.com spotlights an average of eight different designers each day, ranging from small, independent artisans to larger, more established brands. Shellhammer and his sales and acquisitions team aggressively target prospective vendors, leveraging their respective roots and relationships in the design community while also scouring magazines, websites and blogs for candidates. Fab.com works closely with its sellers to present sales that benefit both sides, typically claiming a 20 percent margin for its efforts. And unlike traditional retailers, it does not maintain product inventory--instead, all shipments originate with the seller or, in the case of larger items like furniture, from a fulfillment center partner.

"My sales this summer have been the best I've ever seen, and that has a lot to do with Fab," says jewelry and furniture designer Kiel Mead, who has partnered with the site for multiple sales. "They bring you to a level where you're on sale alongside people more famous and more seasoned than you. It's huge. It's like being written up in The New York Times 10 times. What they're doing for the design community is incredible."

Fab.com also fills and exploits a void created by the economic decline of conventional brick-and-mortar retail. "Traditionally, designers have been very dependent on their few retail channels," Shellhammer explains. "Retailers called the shots--they paid your mortgage or your rent. When those accounts go away, designers are no longer tied to these companies dictating how, when and at what price they sell your products. Suddenly people were free. They didn't have to worry about stepping on anyone's toes, because the big retail accounts are no longer big retail accounts. That's a new phenomenon."

Fab.com's sales model and creative sensibilities herald an important evolution of the design retail business, says Rob Forbes, who founded Design Within Reach in 1999 and currently owns and operates San Francisco-based urban bicycle and gear company Public. "It's a very clean, smart site--both adventurous and sophisticated, but also playful," Forbes says. "The growth Fab.com has had in terms of its client base is significant. You can't get there by brute force. You have to be clever, and put together a model that's meaningful. Curating products is not easy. They will reach a very broad audience because they're not thinking about their audience in a narrow way."

Despite Fab.com's radical makeover, vestiges of the Fabulis platform remain. Social networking is embedded deep within the startup's DNA, and just because it's no longer the focus doesn't mean it's been scrubbed away. Case in point: The Inspiration Wall, a communal "mood board" enabling Fab.com members to create personal profiles while sharing and discovering favorite products, design ideas and photos via images uploaded from their computers, smartphones and Google searches.

"People love sharing designs--they love sharing inspirations," Goldberg says. "It's a business fact that the more people who invite their friends, the lower the cost of acquisitions. It's a huge advantage for us. Everyone knows that sharing is a big part of what Fab is all about. That's why we built the Inspiration Wall before we built the sales site. We said, 'It's going to take us three months to build the sales site, but let's give people something to do.'"

Fab.com's social prowess may ultimately prove to be its biggest differentiator. While a site like Groupon emphasizes restaurant offers, spa packages and other promotions designed to foster real-world interaction, its platform does little if anything to nurture virtual social sharing.

"They're doing social better than anyone else," says First Round's Morgan. "When you're on Fab.com and buying and trying things out, you're pointing other people to neat designs. That kind of integration is something no one else has accomplished. It's proof you can use social networking tools to build giant audiences."

Interactive features like the Inspiration Wall should also translate to user stickiness in the event the daily deals phenomenon loses steam. For now, consumer interest in online flash sales and other limited offerings is still strong: Global credit information group Experian reports that traffic to sites like zulily, ideeli, LivingSocial Escapes and Woot increased 109 percent year over year in July 2011. But the onslaught of deals sites has some analysts wondering if and when consumers will reach a saturation point.

Goldberg isn't concerned. "Amazon.com was e-commerce 1.0--it was about being able to buy things online," he says. "Now we're at the beginning stages of e-commerce 2.0. It's about how you fundamentally change the way products are purchased. We're creating new ways you buy things. It's not about search. It's about people selecting products for you. Less than 5 percent of all purchases are made online today. If e-commerce just grows 5 percent or 10 percent--if it doubles over the next five years--it's a huge market to be playing in."

All evidence suggests Fab.com is just getting started. Not only is business booming, but the site is generating the user traction Fabulis never managed. Fifty percent of all Fab.com members who made at least one purchase went on to make a second purchase, and half of shoppers went on to make more than five purchases.

"We've carved out a very large but unique niche for ourselves," Goldberg says. "Design is a horizontal market, not a vertical. Design crosses multiple categories. Flash sales is just the beginning of what we're doing. We don't consider ourselves a flash sales business. We consider ourselves a design inspiration business."

Shellhammer nods. "Bad design gets under your skin," he says. "People who love design want to better the whole world through design. Everyone's a tastemaker. Everyone's an artist. Once you make the decision to embrace design, it's hard to go back."

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